SILK PURSES & SOWS EARS

1. SILK PURSES & SOWS EARS Session 29: February 27, 2006 Session Producer: Chris Perna, President & COO MedAmerica Insurance Company

2. PANEL • Peter Blume, HQ Reinsurance Leader, Genworth Financial • Andy Perkins, FSA, MAAA, Senior Vice President, Gen Re LifeHealth • Richard Pitbladdo, Chief Financial Officer, LTC Global Solutions, Inc.

3. Long Term Care Reinsurance Peter Blume Reinsurance Leader Genworth Financial

4. What is Reinsurance? The transaction whereby the reinsurer, for a consideration, agrees to indemnify the reinsured company against all or part of the loss that the company may sustain under the policy or policies that it has issued.

5. Early Reinsurance Milestones • Rudimentary Forms of Spreading Risk Beyond a Single “Insurer” Are As Old As Insurance Practices • Can Be Dated Back to Babylonian Times • 1370 First Reinsurance Contract on Record • 1658 First Traced Use of the Term “Reinsurance”

6. Early Reinsurance Milestones • “Modern” Reinsurance Developed Around the Turn of the 19th Century Chiefly in the Fire Insurance Business • 1846 First Independent Reinsurance Company Formed in Germany • “Excess of Loss” Reinsurance First Appeared in Fire Reinsurance

7. Why Reinsurance? • Catastrophe Protection • Stability • Financing • Large Line Capacity • Enter and Exit New Lines of Business • Reinsurer Expertise

8. Long Term Care Market Strengths • Potential Market Is Large and Growing • Market demand increases as Baby Boomers approach retirement age • Data Resources Are Increasing and Underwriting Tools Are Becoming More Sophisticated • The industry continues to evolve and new underwriting tools help to refine pricing and risk selection

9. Long Term Care Market Strengths • Insurer/Regulation Relationships Improving • ACLI is backing a federal LTCI tax bill • Increased Acceptance by Consumers and Financial Planners • Educational Investment by Industry • Consumer Support Growing • Advances in Medicine

10. Long Term Care Market Challenges • Uncertainty in Pricing Assumptions Has Lead to Poor Financial Performance in the Past • Interest Rates are lower than expected • Assumed lapse rates are higher than actual • Statutory Reserving and Capital Requirements Can Be Prohibitive • Initial capital requirements are high • RBC requirements necessitate significant active life reserves

11. Long Term Care Market Challenges • Consumer Attitudes and Perceptions • Recent survey cited cost and confusion as two principle reasons consumers have not bought coverage • Investor’s View of the LTCI Industry • Investors remain cautious regarding future morbidity risks • Many investors simply do not understand the product • Changing Regulatory Environment • Benefit Adjudication

12. LTC Reinsurance Market • Recent Consolidation in the Reinsurance Marketplace As Reinsurers Reevaluate Their Position Within the Market • In 1991 “Reinsurance News” of SOA Reported 15 Reinsurers in the LTC Business. • Through 2002, Three Reinsurers Had Almost 100% of the Market

13. LTC Reinsurance Market • Only a Few Reinsurers Are Actively Looking to Grow Their Book • General Re • Munich American Reassurance Company • GE Insurance Solutions • Handful of Potential New Players Entering the Market, but It Will Take Time for Them to Reach a Level of Comfort With the LTC Product • Everest Re

14. Traditional Reinsurance Methods • Quota Share • Traditional Coinsurance • Ceding company transfers a proportionate share of premiums and losses to the reinsurer. Reinsurer typically pays an allowance (ceding commission) to the cedent to offset underwriting expenses • Modified Coinsurance • Reinsurer transfers its share of reserves to the cedent, though it remains on risk

15. Traditional Reinsurance Methods • Excess • Catastrophe (Excess of Loss) • Reinsurer covers all losses excess of a specified dollar amount • Excess of Time • Reinsurer pays some or all of claims incurred after a specified time • Yearly Renewable Term (YRT) • Reinsurance coverage structured to specifically cover the morbidity risk

16. Traditional Reinsurance Methods • Stop Loss • Reinsurer pays claims that exceed a specific self-insurer retention • Reinsurance of in-force blocks of business • Portfolio transfer

17. Non-Traditional Reinsurance Methods • Substandard Risk • Multi-life Risks • Claims Only Reinsurance • Substandard Impaired Life Annuity

18. Roles in the Reinsurance Relationship • Risk bearer • Which party takes what part of the risk? • Program structure may dictate the reinsurer’s level of involvement • Reinsurer role in risk management • Silent partner or active participant? • Reinsurers with higher exposure will be more involved • Administration of the business • Insurer? Reinsurer? TPA? • Reinsurer can give an outside assessment of the administrative process and suggest improvements

19. Reporting • Underwriting Guildelines • Risk selection criteria • Pricing review • Claims Guidelines and Processes • Financial Security/Strength • New and emerging technologies • Rating agencies • Share risk of adverse experience • Provide earnings stability

20. Analysis • Introduce financial controls • Reserve adequacy • Industry knowledge base • Broader view of market • Information on market trends and issues • Advise/assist with benefit design and underwriting • Tracking results and trends

21. Services • Contract Drafting • Claims adjudication • Audits • Turnkey products • Facultative Underwriting • Particularly difficult risk that require additional coverage • Education • Presentation/workshops • Surveys/research studies

22. Reinsurance Partnership Shared Expectation Both parties expect to make a profit by cooperating and working together in the oversight of the business

23. SILK PURSES & SOWS EARS Effective Claim Management Andy Perkins General Reinsurance

24. The Growing Importance of Claims Administration Ratio of Incurred Claims to Earned Premium (Based on representative assumptions)

25. Risks • LTC insurance is at risk to pay for more care than was intended in the development and pricing of the policy.

26. Risks • Providers make more money the more services are provided. • Some services are ones insureds may want to use. • There are no accepted standards for how much care people need. • Whether an insured needs care is a judgment call, based on very soft criteria.

27. Care Outside Nursing Homes • There’s a trend toward a higher portion of services being provided at home or in ALFs, locations where good claim management is most important. • These are services the insured is more willing to use than nursing homes.

28. Care Outside Nursing Homes • The number of hours of HHC needed is a matter of judgmental, and actual services provided are hard to verify. • Home care and ALFs should be cheaper per day than nursing homes, but care is likely to start earlier when the degree of disability may be far less.

29. Nurses as Insurance Claims Staff • Many companies use nurses in their claim department. • While nurses are knowledgeable, their original training was in providing care. • For many, that may still be their focus, rather than whether benefits paid are as intended under the terms of the policy.

30. Assisted Living Facilities In one study of 80 claimants in ALF’s, only 2 had terminated their claims a year later. That’s only a small sample, but did it occur because claims were being approved when the insureds weren’t very disabled, for people who simply found it attractive to be in that setting?

31. How Many Hours of Care Are Needed? • There is no widely accepted standard. • We’ve seen numerous home health care claims where the ADL problems of the claimant seemed modest, but the insurer paid maximum benefits under the policy, or something close to that.

32. Few Companies Seem to Seriously Explore Rehabilitation Opportunities • One of our clients has tested a physical therapy program they developed for home health care claims, and found a significant reductions in both number of hours of careper week and the duration of the claim. • The claimants were probably happier, too.

33. Examples Demonstrating Some of the Issues

34. Insureds Decide When and If They Are Disabled (1) • A widowed farmer sold his farm and moved to an Assisted Living Facility.The facility nurse’s assessment: needs assistance with bathing and dressing because of a prosthetic hook, due to loss of a hand in an accident. Recommended assistance 4 hours/day.

35. Insureds Decide When and If They Are Disabled (2) After the claim was approved and payments had begun, a claim examiner questioned when and how this accident occurred. It was from a farming accident occurring over 20 years ago and the claimant had been performing these functions independently prior to admission to the ALF.

36. Importance of Getting Medical Records and Other Information (1) Policyholder reports discharge from hospital following a serious fracture of the arm. Claimant lives with mother. Arm is in a sling, and claimant reports pain with any movement. ADL needs: bathing, dressing, toileting assistance and most IADL activity. 24/7 care approved up to daily benefit max. Policy allows for independent caregiver and claimant opts to use one.  

37. Importance of Getting Medical Records and Other Information (2) After 8 months claimant still under medical care, needs unchanged. Insurer obtains records from treating orthopedist, showing simple fracture that healed in 7 weeks. Claimant refused physical therapy after 2 or 3 visits. Further information obtained: informal caregiver has been a live-in housekeeper for years, doing all housekeeping and meal preparations, and provided care to claimant's mother.

38. Intensity of Care Appropriate for Actual Needs of Claimant?(1) 85 year-old goes on claim for increased frailty from spinal stenosis. In-home assessment: claimant needs 8hr/day for bathing, dressing, and toileting as well as IADL’s. Insurer's claim examiner approved it.

39. Intensity of Care Appropriate for Actual Needs of Claimant? (2) Later found in-home assessment stated husband was already receiving care covered under a policy from the same insurer, and his aide would provide care for the wife. Insurer was paying for 8hrs of care (mostly IADL) for each policyholder as if they were in separate homes. Care was reduced to 8hrs combined and all their needs were satisfied.

40. Fairness and Sensitivity to Needs of the Claimant • The goal is to pay the claims intended, for the services that are both needed and covered by the policy. • The insurer should be willing to listen to additional evidence if the claimant disagrees with the insurers position on the amount of covered services needed & reimbursable.

41. Advantages of Good Claim Management • If we can help claimants achieve greater independence, that’s a clear and major benefitto them, not just an advantage to the insurer. • In addition to protecting the financial results of the company, good claim management should reduce the likelihood of rate increases, and lower the size of rate increases if any become necessary. • Over the long run it will also help companies remain competitive for new business, and perhaps influence companies willingness to keep offering long-term care insurance.

42. Suggested Activities • Review some claims. Was the physician contacted to discuss prospects for rehab, modified services, etc.? Were full medical records obtained? • Compare pricing assumptions for the amount of home care per week vs. actual experience. • Discuss w/claim associates how they judge the type and amount of care needed and how often they don’t approve the care plan recommended by the service provider.

43. Suggested Activities • Look at the hours of care approved on home health claims, and whether they seem reasonable for the insured’s ADL needs. • Review ALF claims. Do the records show a level of disability consistent with the stated need for care? Are there efforts to help the claimant achieve a higher level of independence?

44. Disclaimer The material contained in this presentation has been prepared solely for informational purposes by General Re Life Corporation (GRL). The material is based on sources believed to be reliable and/or from proprietary data developed by GRL, but we do not represent as to its accuracy or its completeness. The content of this presentation is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. This document and its contents are proprietary to GRL. Neither this document nor its contents may be copied or reproduced in any manner without the express written consent of GRL.

45. SILK PURSES & SOW’S EARS Richard Pitbladdo LTC Global Solutions

46. Sow’s Ears: Facing the Brutal Facts Dealing with the Brutal Facts Silk Purse: Increasing Premium Product Silk Purse: Policyholder Recontracting Silk Purse: Agency Finance Referrals

47. Sow’s Ear: The Brutal Facts PRESSURE ON INSURANCE CARRIER PROFIT • Long Term Interest Rates Staying Down • Flat Yield Curve (stolen Silk Purse) • Bond Spreads Paper Thin with Real Risk • Persistency

48. Sow’s Ear: The Brutal Facts PRESSURE ON SALES • Prices Must Go Up to Achieve Profit • Less Room Left to Pay Agent Commissions • Demographics: Fighting WWII 65 years Later • What’s your 5-year War Plan?

49. Defensive Strategies INVESTMENT RISK MINEFIELD • Flat Yield Curve Portends Great Risk of Falling Interest Rates • Excess Supply of Investment Funds Chasing Higher Yields

50. Investment Risk Young and growing blocks Baby boom issue ages Compound benefit increases = Betting the farm on interest rates Flat curve: “hedging juice” is gone Be content locking in current rates